Despite industry opposition, insurance companies cannot exclude agent fees and compensation from earned premium for medical loss ratio reporting purposes unless very specific requirements are met, the Centers for Medicare and Medicaid Services now says. In guidance issued late last week, the agency says it will enforce these MLR reporting requirements and insurance companies will be required to take corrective measures if they fail to comply.

The Affordable Care Act established MLR requirements for insurance carriers that went into effect on Jan. 1, 2011. The law mandates that at least 80% (individual and small group) or 85% (large group) of premiums collected by the carrier must be spent on claims payments and “health care quality improvement.” The restrictions mean no more than 20% or 15% may go toward “non-claims costs” such as profits, advertising, administrative costs, etc. If a carrier does not meet these ratios, they must issue rebates to the consumer.

See also: How much does MLR harm brokers

Samara Lorenz, acting director of the health insurance oversight group at CMS, said in a bulletin, the ACA requires issuers to report agent and brokers fees and commissions as a non-claims cost because “such fees and commissions are generally a condition of receiving coverage and an expense of the issuer and not a separate cost incurred by the policy holder.”

In light of the fact there may be instances where the policyholder does retain the agent or broker and negotiate and pay the agent or broker’s fee or commission, CMS is now saying it may be acceptable for an issuer to exclude agent or broker fees and commissions from premium for MLR reporting purposes if the following seven criteria are met:

1)      The law of the state in which the policy is issued does not deem the agent or broker to be a representative of the issuer;

2)      The policyholder is not required to utilize an agent or broker to purchase insurance and may purchase a policy directly from the issuer;

3)      The policyholder selects, retains, and contracts with the agent or broker on his or her own accord;

4)      The policyholder negotiates and is responsible for the fee or commission separate and apart from premium;

5)      The issuer does not include these agent or broker commissions and fees in rate filings submitted to the applicable regulatory agency;

6)      The policyholder voluntarily chooses to pass the fee or commission through the issuer and is not required to do so, or the policyholder pays the fees or commission directly to the agent or broker; and,

7)      The policyholder issues the 1099 to the agent or broker, if a 1099 is required.

If any of those seven conditions is not met, Lorenz says, “The issuer must include the agent or broker fees and commissions in earned premium for MLR reporting purposes.”

Industry opposition

The MLR regulations have had a “detrimental impact on insurance agents as well as consumers who rely on those agents for advice,” says Charles Symington, senior vice president for external and governmental affairs for the Independent Insurance Agents & Brokers of America (IIABA or the Big “I”).

According to the trade group, many insurance carriers have significantly cut their agent compensation in an effort to comply with the MLR regulation.

The National Association of Insurance and Financial Advisors agrees, saying most insurance companies have slashed agent commissions, in many cases by 50%. Eighty percent of NAIFA members surveyed have seen decreased commissions since the MLR went into effect, the group says.

“Including insurance brokers’ compensation in the MLR is a bad idea, so we welcome progress toward getting their commissions removed from the calculation,” says NAIFA President Juli McNeely. “Since the MLR went into effect, our members who provide health coverage have seen their compensation decrease dramatically. This doesn’t just hurt the brokers, but also their employees and, most importantly, the consumers who rely on them to obtain coverage and assistance in understanding the complex health care law.”

In February, Reps. Billy Long (R-Missouri) and Kurt Schrader (D-Oregon) introduced the “Access to Professional Health Insurance Advisors Act of 2015.” The bill would clarify that agent compensation is not part of the MLR formula as enacted in the ACA.

See also: House revives efforts to separate agent compensation from MLR

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